Lecture Notes

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Intro: Activity-Based Costing

Growth in automation of manufacturing (e.g. robotics, high-tech machinery, computers) changes nature of manufacturing and composition of total product cost. (becomes smaller)

Significance of direct labor cost diminished, overhead costs increased. More R&D, marketing, distribution, admin costs

Overhead rates based on labor or volume-based cost drivers become inaccurate (doesn't represent cause-effect relationship)

activity based costing assigns costs to products based on product's use of activities instead of product volume

products use resources in different amounts. some resources don't vary in volume.

Traces costs to activities then to products (instead of departments then products)

Uses a lot more cost drivers - different overhead cost pools and rates for each cost driver = enhanced accuracy

Use ABC when

Different types of products (uses resources in different ways)

Different types of customers (who use resources in very different ways)

Non-production activities (significant part of costs)

Loss of opportunities (competitive market demands accurate cost estimates)

because it's designed around organizational activities, accounts for causality, and can recognize lare variety o cost drivers

ABC system classifies activities and cost drivers:

Unit level activity - activities varies with number of units produced or sold

Batch level activity - activities that vary with batches

Product and customer level activity - specific characteristics of products or customers

Facility sustaining activity - activities directly linked to running the business (office space)

LChapter 10 Answers

1. Highly competitive firms that rely on marketing, or batch industries like Nike

2. Manufacturing costs represent a large percentage of total costs; it's expensive; business is not complex

3. Most of its indirect costs is attributed to operating machinery